Will New Year’s New Tax Cuts Hit New Jersey’s Budget and New Governor’s Plans?

NJ’s cash-starved state budget expected to take big hit as estate tax goes by the board and sales tax inches down

New Jersey is known around the country for having high taxes, but for the second year in a row a series of tax cuts just went into effect at the start of a new year. This year’s cuts include a slight reduction of the general sales tax, and the outright elimination of the estate tax.

The 2018 tax changes were triggered by a bipartisan deal that Gov. Chris Christie struck with Democratic legislative leaders in 2016, when they also agreed to increase the state’s gas tax by nearly a quarter.

For many New Jersey motorists, the higher gas tax has been somewhat obscured by relatively low fuel prices, and this year’s tax cuts could also go largely unnoticed, in part because the biggest savings will go to those with very large estates, and to residents with the means to spend the most on items that are subject to the sales tax.

But one area where the tax cuts are expected to have a big impact is on the cash-starved state budget, with projections for the current fiscal year suggesting the tax cuts are costing roughly $500 million in lost revenue. That total is projected to double to around $1 billion during the state’s next fiscal year. With Democratic Gov.-elect Phil Murphy getting ready to replace the Republican Christie later this month, the impact of the tax cuts could put pressure on the new governor to eventually reverse them, especially if the fiscal projections he’s inheriting from Christie fail to come through.

Christie and Democrats agreed to the cuts

The bipartisan tax deal that was agreed to by Christie and Democratic legislative leaders in 2016 resulted in an immediate 23-cent hike of the state’s gas tax to bring in more revenue for spending on transportation projects. It also involved a series of phased-in tax cuts that have included the reduction of the sales tax, and the elimination of the estate tax.

The first phases of those tax cuts started last year, and the sales tax was lowered again yesterday, from 6.875 percent to 6.625 percent. The estate tax also went yesterday from being levied only on estates worth more than $2 million, to being completely eliminated for all estates.

New Jersey’s earned income tax credit also increased under the 2016 deal, and income-tax exemptions for pensions and other sources of retirement income were expanded. A new tax credit for veterans was also created by Christie and lawmakers in 2016.

Christie sold the tax changes last year as being a net win for New Jersey residents even though it will take several years for the projected savings from the tax cuts to overtake the additional more than $1 billion that motorists are paying each year because of the increased gas-tax rate.

Christie bragged about the cuts during a recent speech before the Morris County Chamber of Commerce when discussing his legacy on economic issues as he gets ready to leave office on January 16.

Christie: ‘…you’d have called me crazy’

“If I told you eight years ago when I came into office that I would get a Democratic Legislature to vote to eliminate the estate tax you’d have told me I was crazy, but we did,” Christie said. “If I told you I’d get a Democratic Legislature to reduce the sales tax you would have told me I was crazy, but we did.”

The elimination of the estate tax was also highlighted by the New Jersey Business & Industry Association’s Michele Siekerka as she outlined the results of her organization’s latest member survey last month. The NJBIA poll showed an uptick in business owners who are planning to stay in New Jersey when they retire rather than leaving for lower-cost states.

“We believe this upward trend is due to the gradual elimination of the estate tax, which we long advocated for to spur small business succession planning and to slow outmigration to tax-friendlier states,” Siekerka said.

But it remains to be seen just how the tax cuts will impact the state budget, especially at a time when state pension contributions and several other line items in the budget have been rising each year. After the tax deal was announced in 2016, Moody’s Investors Service, a major Wall Street credit-rating agency, labeled the cuts a “credit negative” for New Jersey, predicting they would “strain the state’s operating budget” as they continue to be phased in.

$500M revenue loss this fiscal year, $1B next year

Estimates prepared by the nonpartisan Office of Legislative Services projected a loss of revenue from the reduced sales tax and the elimination of the estate tax — the two biggest cuts in the 2016 tax package — of about $500 million for the current fiscal year, and nearly $1 billion during the next fiscal year. In the current fiscal year, the reduced sales tax is costing an estimated $382 million, and the estate tax elimination is costing another nearly $120 million, according to the OLS projections. The following fiscal year, the impact from the sales-tax reduction will grow to nearly $600 million, and the estate tax to $320 million.

Murphy, a newcomer to elected office, has been raising concerns about the health of the current fiscal year budget during the ongoing transition period, and Christie’s track record with revenue projections has generally been spotty. NJ Spotlight reported last year that tax collections have fallen short of targets in five of the seven state budgets that Christie has authored, leading to calls for an overhaul of the state’s revenue-forecasting process. Yet Christie increased spending by about $1 billion in his final budget even while the tax cuts ramped up.

Maintaining a healthy state budget will be a key concern for Murphy since he promised on the campaign trail last year to increase spending in several areas, including K-12 education and public-worker pensions. He said he would raise new revenue and restore fairness to state fiscal policies, in part by creating a new top-end income-tax rate for earnings over $1 million of 10.75 percent that would raise an estimated $600 million in annual revenue.

So far, Murphy has not backed off that plan, even as some lawmakers have questioned whether it makes sense to pursue it after new federal-tax policies enacted recently by President Donald Trump and the Republican Congress will now prevent New Jersey residents from writing off their full state and local tax burdens. Without offering specifics, Murphy told reporters during a recent event in Secaucus that “everything has to be on the table” when it comes to discussing taxes in New Jersey in the wake of the federal changes, which he opposed.

“It will not be easy, but we will achieve together the stronger and fairer economy that works for all families and individuals,” Murphy said.